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Posted by on Jul 24, 2021 in Publications |

Arbitration clauses may be losing their luster for some companies

Arbitration clauses may be losing their luster for some companies

Earlier this month, Amazon circulated a short e-mail that it was updating its Conditions of Use, which, as of May 2021, “provides for dispute resolution by the courts” rather than the previous compulsory arbitration process. And with this single, simple sentence, one of the largest corporations in the world has now radically diverged from the thousands of businesses that have made it a standard business practice to send legal disputes to arbitration, rather than the court system. To better understand the significance of this change, a short explanation may be helpful.

Arbitration is part of a system known as “alternative dispute resolution” (“ADR”), which includes other processes such as mediation. The ADR system exists as a way to resolve disputes outside of the courts and was initially conceived as a way to more efficiently and quickly resolve legal disputes as well as to alleviate the strain on the overburdened court system. Put more simply, instead of waiting for years for a court trial, arbitration allowed you to pay a former judge to resolve your case in months, not years, theoretically saving time and money.

With the help of legislative and judicial system at the federal and state level – much of which have put their full weight behind the legitimization of the arbitration process – the ADR system, and arbitration in particular, flourished, with companies and organizations such as Judicate West and the American Arbitration Association springing up to offer arbitration services to all of those who wanted and needed them.

However, arbitration has long since become a source of friction between consumers and employees on the one hand and businesses on the other. A search of the phrases “compulsory arbitration” or “mandatory arbitration” on Google results in a laundry list of complaints about the arbitration system, which has more and more frequently been forced on consumers and employees by businesses who view the arbitration system – versus the court system – as cheaper, more efficient, more likely to result in favorable decisions to them, a disincentive to file a lawsuit, and a shield against large jury verdicts. In short, businesses prefer arbitration on the belief that it favors them over the average consumer or employee.

For these reasons, many businesses attempt to compel consumers and employees to agree to arbitrate all legal disputes. The usual consequence of such an agreement is that the right to use the court system is waived and only the arbitration system can be used to obtain relief.

Often, the agreement to arbitrate is buried in lengthy terms and conditions and wrapped in legalese, such that it is not unusual for consumers and employees to be entirely unaware that they have waived their right to a jury trial by doing something as mundane as sending flowers to a loved one or ordering delivery. Yet more often than not, courts, whether willingly or because they are left with no choice, regularly enforce these arbitration requirements. The result is that consumers and employees who expect to be able to file a lawsuit if they are wronged by a business often find themselves forced into restrictive arbitrations against their will.

Why then would Amazon choose to abandon the arbitration process and return to the courts? Only Amazon knows for certain the actual answer to that question, but one likely reason is that plaintiffs lawyers have finally found a way to make the arbitration system too costly for Amazon to continue using.

The question this raises, of course, is whether Amazon will be standing alone in its decision or if it is the start of a major exodus away from arbitration and back to the court system as the preferred method of resolving legal disputes with consumers and employees. Regardless, if you own a business and utilize contracts or agreements with an arbitration clause, it may be prudent to consider the problems encountered by Amazon and decide if the newly-discovered risks of using an arbitration clause outweigh the benefits of arbitration.